May 10, 2024
Earnings call: Prospect Capital reports steady growth in Q3 FY2024
Prospect Capital Corporation's recent earnings report underscores its commitment to shareholder returns, as evidenced by the consistency in its dividend distributions.
 

Prospect Capital (NASDAQ:PSEC) Corporation (NASDAQ: PSEC) has announced its third-quarter fiscal year 2024 earnings, demonstrating a solid performance with an increase in net asset value (NAV) and announcing consistent shareholder distributions.

The company reported net investment income (NII) of $94.4 million, or $0.23 per common share, and an NAV of $3.74 billion, or $8.99 per common share, a slight rise from the previous quarter. The net debt-to-equity ratio stood at 46.2%. Prospect Capital also declared monthly common shareholder distributions of $0.06 per share for the upcoming months.

Key Takeaways

• Net investment income for the quarter was $94.4 million.

• NAV per common share increased to $8.99, up $0.07 from the prior quarter.

• Announced monthly shareholder distributions of $0.06 per share for May through August.

• Portfolio composition showed an increase in first lien debt and a decrease in second lien debt and subordinated structured notes.

• The company’s investment portfolio is diversified with no significant industry concentration.

• Non-accruals slightly increased to 0.4% of total assets.

• Originations totaled $219 million, with net originations of over $105 million after repayments and exits.

 
Company Outlook

• Prospect Capital plans to continue its strategy of investing in secured debt and selected equity investments.

• The company aims to capitalize on distressed sellers and preferred equity structures in the real estate sector.

• Prospect’s private REIT strategy remains focused on multifamily workforce properties with attractive financing.

 

Bearish Highlights

• A slight decrease in annualized yield from performing interest-bearing investments to 12.1%.

• An increase in non-accruals as a percentage of total assets, now at 0.4%.

 

Bullish Highlights

• The company’s largest industry concentration is at a low of 18.4%.

• Real estate properties have shown resilience with rising rents and high collections.

• NPRC’s exited properties have yielded an average net realized IRR of 25.2%.

 

Misses

• The company experienced a decrease of four in the number of portfolio companies.

 

Q&A Highlights

• The call included discussions on the company’s performance, portfolio composition, and future outlook.

• Prospect Capital emphasized its strong balance sheet, diversified funding sources, and prudent investment approach.

Prospect Capital’s management highlighted the company’s strong recurring revenue profile, with 91% of total investment income coming from interest income. They also pointed out the company’s disciplined approach to portfolio diversification and risk management, which has helped maintain a stable financial position.The company’s focus on avoiding cyclical industries and significant industry concentration has contributed to its robust portfolio health, with the largest industry concentration being only 18.4% and minimal exposure to volatile sectors like energy, hotel, restaurant, and leisure, and retail.The management team also discussed the company’s strategic investments in real estate, which have been an inflation hedge and have benefited from strong market tailwinds. They noted the successful exits from NPRC’s real estate properties, which have generated significant returns.On the financial side, CFO Kristin Van Dask outlined the company’s strong liquidity position, diversified access to matched-book funding, and the lack of near-term maturities, which demonstrate balance sheet strength. Prospect Capital has a substantial amount of unencumbered assets and has secured support from a wide array of banks, further underscoring its financial stability.The conference call concluded with an opportunity for questions, reinforcing Prospect Capital’s commitment to transparency and engagement with its stakeholders.

InvestingPro Insights

Prospect Capital Corporation’s recent earnings report underscores its commitment to shareholder returns, as evidenced by the consistency in its dividend distributions. The company’s ability to maintain these payments is notable, especially as it has done so for 21 consecutive years, which is a testament to its financial resilience and strategic management. This is one of the key InvestingPro Tips that investors may find reassuring, particularly those who prioritize income-generating investments.From a valuation standpoint, another InvestingPro Tip points out that Prospect’s valuation implies a poor free cash flow yield. This could be a concern for investors focused on the company’s ability to generate cash after capital expenditures, which is crucial for funding operations and maintaining dividend payments.In terms of financial metrics, Prospect Capital’s market capitalization stands at approximately $2.25 billion, reflecting the size and scale of the company within its sector. The P/E ratio is currently at -27.37, which may suggest that the market expects a turnaround or that the company is undervalued relative to its earnings.Despite not being profitable over the last twelve months, Prospect Capital has reported a robust gross profit margin of 100% in the last twelve months as of Q2 2024, which indicates that the company has been effective in managing its cost of sales.Investors looking for further insights and additional InvestingPro Tips can find them at https://www.investing.com/pro/PSEC. There are currently 4 additional tips available, which could provide a deeper understanding of Prospect Capital’s financial health and investment potential. To access these insights and enjoy a comprehensive analysis, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.

Full transcript – Prospect Capital Corp (PSEC) Q3 2024:

Operator: Good day, and welcome to the Prospect Capital Third Quarter Fiscal Year 2024 Earnings Release and Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. John Barry, Chairman and CEO. Please go ahead.

 
John Barry: Thank you, Allan. Joining me on the call today are Grier Eliasek, our President and Chief Operating Officer; and Kristin Van Dask, our Chief Financial Officer. Kristin?
 
Kristin Van Dask: Thanks, John. This call contains forward-looking statements that are intended to be subject to safe harbor protection. Future results are highly likely to vary materially. We do not undertake to update our forward-looking statements. For additional disclosure, see our earnings press release and 10-Q filed previously and available on our website prospectstreet.com. And now I’ll turn the call back over to John.
 
John Barry: Thank you, Kristin. In the March quarter, our net investment income or NII was $94.4 million, $0.23 per common share. Our NAV was $3.74 billion or $8.99 per common share, up $0.07 from the prior quarter. At March 31, our net debt-to-equity ratio was 46.2%. We are announcing monthly common shareholder distributions of $0.06 per share for each of May, June, July and August. We plan on announcing our next set of shareholder distributions in August. Grier?
 
Grier Eliasek: Thank you, John. As of March 31, our portfolio at fair value comprised 59% first lien debt. That’s up 0.3% from the prior quarter, 14.6% second lien debt, that’s down 0.9% from the prior quarter, 7.3% subordinated structured notes with underlying secured first lien collateral, that’s down 0.6% from the prior quarter, and 19.1% unsecured debt and equity investments. That’s up 1.2% from the prior quarter, which results in 81% of our investments being assets with underlying secured debt benefiting from borrower pledged collateral. Prospect’s approach is one that generates attractive risk-adjusted yields. In our performing interest-bearing investments, we’re generating an annualized yield of 12.1%, as of March 2024, a decrease of 0.2 percentage points in the prior quarter. Our interest income in the March quarter was 91% of total investment income, reflecting a strong recurring revenue profile to our business. As of March, we held 122 portfolio companies, the decrease of four from the prior quarter with a fair value of $7.8 billion, an increase of approximately $175 million. We also continued to invest in a diversified fashion across many different portfolio company industries with a preference for avoiding cyclicality and with no significant industry concentration. The largest is 18.4%. As of March, our asset concentration in the energy industry stood at 1.4% in the hotel, restaurant and leisure sector stood at 0.3%, and the retail industry stood at 0.3%. Nona-ccruals as a percentage of total assets was approximately 0.4% in March, a 0.2% increase in the prior quarter. Our weighted average middle market portfolio net leverage stood at 5.5 times EBITDA, substantially below our reporting peers. Our weighted average EBITDA per portfolio company stood at $106 million. Originations in the March quarter aggregated $219 million. We also experienced $114 million of repayments, sales and exits, resulting in net originations of over $105 million. During the March quarter, our originations comprised 65.3% middle market lending, 29% real estate and 5.6% middle market lending and buyouts. To date, we’ve deployed significant capital in the real estate arena through our private REIT strategy, which is largely focused on multifamily workforce, stabilized yield acquisitions with attractive in-place multiyear financing. To date, on a cumulative basis, we’ve invested in $3.9 billion across 110 properties, including three triple net lease, 83 multifamily, 8 student housing, 12 self-storage and four senior living. That’s on a cumulative basis. In the current higher financing cost environment, we’ve added to our investment focus to include preferred equity structures with significant third-party capital support underneath our investment attachment points. We’re also focusing on distressed sellers where there’s an opportunity to take advantage of the sellers need to recapitalize the property or generate liquidity to address other issues in their portfolios. NPRC, our private REIT has real estate properties that have benefited over the last several years from rising rents, showing the inflation hedge nature of this business segment, solid occupancies, high collections, suburban work-from-home tailwinds, high-returning value-added renovation programs and attractive financing recapitalizations, resulting in an increase over time in cash yields as a validation of this income growth business alongside our corporate credit businesses. NPRC, as of March and not including partially exited deals where we have received back more than our capital invested from distributions and recapitalizations, has exited completely 46 properties at an average net realized IRR to NPRC of 25.2% and average realized cash multiple of invested capital of 2.5 times. Our structured credit business has delivered attractive cash yields, demonstrating the benefits of pursuing majority stakes, working with world-class management teams, providing strong collateral underwriting through primary issuance and focusing on favorable risk-adjusted opportunities. As of March, we held $572 million across 33 non-recourse subordinated structured notes investments. We expect to continue to amortize our subordinated structured notes portfolio and to reinvest into middle market senior secured debt and selected equity investments. As a result of the structured notes portfolio now comprises 7% of our investment portfolio and is expected to decrease over time. These underlying structured credit portfolios comprised nearly 1,600 loans. In the March quarter, this portfolio generated a GAAP yield of 3.3% and a cash yield of 22.1%. The difference representing amortization of our cost basis, the returns capital to prospects that we intend to use for other investment strategies and corporate purposes. As of March, our current subordinated structured credit portfolio has generated $1.5 billion in cumulative cash distributions to us, representing 121% of our original investment. Through March, we’ve also exited 15 investments with an average realized IRR of 12% in cash on cash multiple of 1.3 times. So, far in the current June quarter, we booked $29 million in originations and experienced $55 million of repayments for approximately $26 million of net repayments. Originations have consisted of 57% middle market lending and 43% real estate. Thank you. I’ll now turn the call over to Kristin. Kristin?
 
 
 

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